The end of March saw a flurry of activity on operational resilience as the UK regulators published final policy on operational resilience and, for the UK Prudential Regulation Authority (PRA), final rules on outsourcing and third party risk management while the Basel Committee on Banking Supervision (BCBS) issued its new Principles for Operational Resilience and revised Principles for the Sound Management of Operational Risk.
Tag: Senior managers
At the end of 2020, we identified the following key issues to have in mind as we entered the LIBOR “endgame”:
- Readiness, meeting the milestones set by relevant industry groups
- Right time, the need to communicate with customers in a timely way
- Right information, communicating in a way that’s clear, fair and not misleading
- Right rate, using a fair replacement rate
- Remaining contracts, managing “tough legacy”
- Record keeping, the importance, not least for senior managers, of having a record of decisions and their rationale
The PRA and FCA have reinforced all these points in a Dear CEO letter published on 26 March 2021, which is considered in further detail below.
The issues raised in this Dear CEO letter are not unexpected. But that does not mean they are straightforward to manage. Continue reading
The Monetary Authority of Singapore (MAS), the Singapore Exchange Regulation (SGX RegCo), and the Stock Exchange of Hong Kong Limited (SEHK) have all published consultation papers reaffirming the regulators’ continued focus on culture and conduct, and keeping ‘bad apples’ out of financial institutions (FI) and public companies.
The FCA and PRA have now both published their Consultation Papers on the implementation of the remuneration provisions of the revised Capital Requirements Directive (referred to as CRD5), which will apply in the UK and the EU from 29 December 2020. Continue reading
On 19 March, the UK Government published guidance requesting that schools and other educational institutions provide limited care for children whose parents have roles that are critical to the COVID-19 response. This includes parents working in certain financial services roles that are essential to the functioning of the economy (referred to as “key financial workers” or “KFWs“).
- A KFW is any individual who fulfils a role which is necessary for the firm to continue to provide (i) essential daily financial services to consumers, or (ii) ensure the continued functioning of markets. The guidance provides a list of example KFWs (PRA) (FCA).
- KFWs could work for any categorisation of financial institution (e.g. dual or solo regulated, payment service providers, market infrastructure providers).
- Firms are best placed to identify their KFWs; they should start by identifying the firm’s activities, services or operations which are essential to services in the real economy or financial stability and then identify the individuals essential to support those functions.
- The PRA/FCA expects that most firms will have a limited number of KFWs.
- When considering KFWs, firms should also identify any critical outsource partners that are essential to the continued provision of services, even if these are not financial services firms.
- The PRA/FCA recommends that the Chief Executive Officer Senior Management Function (SMF1) (or, if not applicable, an equivalent senior member of the management team) is accountable for ensuring an adequate process so that only roles meeting the KFW definition are designated.
- Firms should consider issuing letters to all individuals identified as KFWs as evidence of their status.
Our general briefing on COVID-19 – Key Issues for Employers is available here.
The FCA has published information for firms on COVID-19. Communication with the FCA will be key as the situation evolves, and we recommend that firms regularly monitor the FCA’s website for news and developments.
Firms are expected to:
- take reasonable steps to ensure they are prepared to meet the challenges coronavirus could pose to customers and staff, particularly through their business continuity plans;
- be clear and transparent, and provide strong support and service to customers during this period (being flexible to meet retail customers’ needs in unusual times is a core theme); and
- manage their financial resilience and actively manage their liquidity, and report to the FCA immediately if they believe they will be in difficulty.
The FCA is taking this opportunity to provide some high level guidance and to remind firms of their obligations as the consequences of this pandemic unfolds before us. For example, reminding firms to report their concerns to the FCA, notwithstanding existing reporting obligations on regulated firms. The COVID-19 situation is unprecedented and has already caused significant impacts on the financial system globally. It is encouraging that the FCA appears to be taking steps to assist firms, and themselves, to prepare for any future uncertainty arising from this situation.
The information published includes guidance on the following key areas:
- Regulatory change – The FCA is reviewing its own work plan so that it can delay or postpone activity which is not critical to protecting consumers and market integrity in the short-term. Immediate actions include: extending the closing date for responses to open consultation papers and Calls for Input until 1 October 2020; rescheduling most other planned work; and scaling back the programme of routine business interactions. The FCA does not elaborate on other areas of impact, so we will have to wait and see whether this includes, for example: enforcement investigations, processing day-to-day authorisations or change in control approvals, and issuing market studies etc.
- Impact on consumers – The FCA welcomes the flexibility some firms have introduced to support customers. Firms should notify the FCA when going beyond usual practices to support their customers so the FCA can consider the impacts and offer support as appropriate. The FCA also reminds firms of their obligations to deal with customer complaints promptly.
- Mortgages – The FCA is encouraged by the actions of some lenders in granting flexibility on mortgage repayments to protect customers, and will be discussing with the industry and updating the approaches which mortgage providers may take for assisting customers in the coming days.
- Unsecured debt products – Firms are encouraged to show greater flexibility to customers in persistent credit card debit. In light of the challenges customers are currently facing, until 1 October 2020 these customers should be given longer to respond to communications from their providers, which means their card will not automatically be suspended if escalation measures are offered by their provider (and not responded to) after 36 months of persistent debt.
- Access to cash – Firms should ensure vulnerable customers are protected when accessing their banking services online or over the phone, particularly for the first time, and should remind customers to be aware of fraud and protect their personal data.
- Insurance products – The FCA supports firms offering travel insurance in making consumers aware of the scope of their cover and any exemptions which may apply. This information should be made available online in a clear and concise way and consumers should have access to call centres. For health insurance, the FCA expects firms to make clear any time period restrictions when consumers take out a new policy.
- Operational resilience – The FCA expects all firms to have contingency plans in place to deal with major events and that the plans have been tested. Firms should consider whether their contingency plans are appropriate to the conditions which are currently unfolding and that these have been tested appropriately. Firms should also take all reasonable steps to meet the regulatory obligations which are in place to protect their consumers and maintain market integrity. For example, if a firm has to close a call centre, requiring staff to work from other locations (including their homes), the firm should establish appropriate systems and controls to ensure it maintains appropriate records.
- Market trading and reporting – As firms are moving to alternative sites and working from home arrangements, the FCA wants them to consider the broader control environment in these new circumstances. Three particular areas are highlighted:
- Call recording: Firms should make the FCA aware if they are not able to meet call recording requirements; and take mitigating steps (eg enhanced monitoring, or retrospective review).
- Submission of regulatory data: If firms experience difficulties with submitting their regulatory data, the FCA expects them to maintain appropriate records during this period and submit the data as soon as possible. Where firms have concerns, they should contact the FCA as soon as possible.
- Market abuse: Firms should also continue to take all steps to prevent market abuse risks (including enhanced monitoring or retrospective reviews). The FCA will continue to monitor for market abuse and, if necessary, take action.
On 17 March 2020, the FCA also temporarily prohibited short-selling of 129 financial instruments under Articles 23 (1) and 26 (4) of the Short-selling Regulation (SSR), following a decision made by another EU national competent authority (NCA). This prohibition lasted until the end of yesterday’s trading day and followed a similar prohibition which took effect during the trading day of 13 March 2020.
The FCA has also confirmed that it will lower the thresholds for the notification of short selling positions under the SSR. This follows the decision of the European Securities and Markets Authority (ESMA) on 16 March 2020 to temporarily require the holders of net short positions in shares traded on an EU regulated market to notify the relevant NCA if the position reaches or exceeds 0.1% of the issued share capital. The amendment will require changes to be implemented to the FCA’s technology so firms should continue to report according to the previous thresholds until further notice.
Senior managers / conduct
In light of the unprecedented nature of the current situation, the senior management of firms may find themselves having to make immediate and difficult decisions. Therefore, senior managers will want to pay close attention to being able to show that “reasonable steps” were taken and ensuring that appropriate records are maintained which document decisions and the rationale.
The FCA has set out its expectations for asset management firms in a recent ‘Dear CEO’ letter (the Letter), confirming that such firms should be taking proactive steps now, and should be in no doubt that they have a “responsibility to facilitate and contribute to an orderly end to LIBOR”.
This letter follows on from the suite of documents published by the FCA and Bank of England (BoE), together with the Working Group on Sterling Risk Free Reference Rates (RFRWG) earlier this year (see our blog post for more information).
Asset management firms should:
- Reflect on the messages and act – do not wait for instructions from clients. The FCA has noted that this is a market event and solutions will be market-led. Firms should not expect or base their transition plans on future regulatory relief or guidance or legislative solutions.
- Take immediate action to develop and execute an appropriate LIBOR transition plan where you have LIBOR exposures (if a transition plan has not already been prepared). This may include revising Senior Managers’ Statements of Responsibilities. Your transition plan must be board approved and supervised.
- Inform the FCA immediately if the Board considers that a barrier to transition is “insurmountable” or if preparations will not be completed in time.
- Monitor the FCA’s Transition from LIBOR’s webpage for further updates.
FCA, BoE and RFRWG targets have a “direct read across” for asset management firms
The papers published in January set out a series of targets over the course of 2020 (and early 2021) for banks and other relevant firms to meet to ensure the smooth transition from LIBOR. In the Letter, the FCA sets out how some of these targets apply to asset management firms.
It may be necessary to change the services and products offered
The Letter makes clear that firms will need to consider what products and services they offer their clients and how LIBOR may impact them.
For example, managing the transition for products such as funds, collective investment schemes and/or segregated mandates which reference LIBOR may involve offering new products that reference alternative rates; or amending existing products to include fall-back provisions or replacing LIBOR with alternative rates.
Where asset management firms invest in products which reference LIBOR, such as bonds, loans, swaps and structured products, firms may need to invest in different instruments, or engage with issuers and counterparties to convert outstanding instruments to alternative rates.
Senior management should be appropriately involved
The FCA and PRA wrote to banks in 2018 to ensure Senior Managers were identified who would oversee the implementation of the transition from LIBOR (Dear CEO Letter on firms’ preparations for transition from LIBOR to risk-free rates published in September 2018).
This Letter confirms that Senior Managers at asset management firms also need to have oversight of the transition process, and firms need to be clear on who has accountability for managing each aspect of the transition. Statements of Responsibility may need to be updated to include responsibilities arising from firms’ transition plans.
Even if firms have little or no LIBOR exposure, the FCA expects Boards to test this view periodically.
Firms must still manage conflicts of interest
The Letter makes clear that while transitioning clients from LIBOR, all clients should be treated fairly and should have their interests upheld throughout the process. Conflicts of interest must be mitigated or managed appropriately, and clients should not be exposed to unpredictable or unreasonable costs, losses or risks.
What to consider when preparing transition plans
The FCA considers that firms’ transition plans should be prepared across business functions, and based on engagement with wider transition efforts in the market. Firms will need to fully understand and quantify how their operations are vulnerable to LIBOR cessation (the FCA acknowledges that LIBOR is embedded in a wide range of systems), consider how LIBOR exposures can be addressed, and ensure that clients are kept updated.
Progress throughout execution of the transition plan should be monitored to ensure exposures are decreasing over time to meet the necessary targets.
The FCA and PRA have confirmed that the next 12 months will be a critical period in transitioning away from the use of LIBOR, advising firms to accelerate their efforts to cease reliance on LIBOR by end-2021. The regulators will step up engagement with firms on LIBOR transition and have contacted senior management responsible for overseeing the transition to set out their expectations for the coming months.
In a suite of documents published last week, the Working Group on Sterling Risk Free Reference Rates (RFRWG), together with both regulators and the Bank of England (BoE), set out the priorities and other actions market participants should take to reduce LIBOR exposure. The documents published include:
- Joint PRA/FCA letter to senior managers of major banks and insurers – Next steps on LIBOR transition
- FCA and BoE statement encouraging switch from LIBOR to SONIA (Sterling Overnight Index Average) for sterling interest rate swaps from 2 March 2020
- RFRWG’s priorities and roadmap for 2020
- RFRWG statement on the use cases of benchmark rates: compounded in arrears, term rate and further alternatives
- RFRWG factsheet – Progress on the transition of LIBOR-referencing legacy bonds to SONIA by way of consent solicitation
- RFRWG factsheet – Calling time on LIBOR: Why you need to act now
Milestones for transition
The documents include the RGRWG’s key milestones and targets for firms over the coming months (see timeline below).
The UK regulators both fully support the timeframe proposed by the RGRWG. The FCA and BoE have also published a statement encouraging market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA from 2 March 2020.
Alongside these key milestones, the RGRWG will continue its own education, awareness and communication campaigns.
Key regulatory expectations
The key message from these publications is that sterling LIBOR is expected to cease to exist after the end of 2021, and no firm should plan otherwise. Transition plans should cover firms’ stock of legacy LIBOR-linked contracts, as well as new contracts entered into from this year onwards.
Firms should also note several other regulatory expectations highlighted in the documents, including:
Firms should engage proactively with clients and market initiatives
Market participants should be taking appropriate steps to establish that their clients are aware of the risks if new LIBOR transactions are entered into. This expectation to support clients is also brought out in the statement on the use cases of benchmark rates, where the RFRWG suggests within a decision tree that all clients (except large corporates where the transaction size is £25 million or greater) may need to explore with their bank contacts alternatives to compounded SONIA (such as BoE base rates or fixed rates) which are better suited to their needs.
Regulators also expect all firms to play their part in meeting the targets by actively engaging in transition efforts in the market. While progress has been made to date, regulators expect to see clear evidence of engagement from firms from the beginning of Q1 2020.
Senior management should be tracking progress
Senior management should ensure that the management information they receive in respect of LIBOR transition plans tracks performance against targets. This will be relevant to all firms for whom the transition from LIBOR is relevant, but will be particularly important for the senior managers at banks and insurers who have been identified as responsible for overseeing the implementation of the transition plans (in accordance with the FCA and PRA’s Dear CEO Letter on firms’ preparations for transition from LIBOR to risk-free rates and feedback statement published in September 2018 and June 2019, respectively).
Action is expected in key areas and should feature in firms’ planning from Q1 2020
Action in the following areas has been highlighted as being key to delivery and is expected to feature in firms’ planning from Q1 2020: product development; reviewing infrastructure (including updating loan system capabilities); client communications and awareness; and updating documentation.
Firms should be mitigating the risks from the transition
The FCA and PRA are aware that firms are transitioning at different rates, but all firms need to be proactive in taking early action to mitigate the risks from transition.
Increased focus on supervisory powers
The publications from the FCA and BoE make clear that they intend to make use of their supervisory powers if firms are seen to be falling short of their expectations.
In the letter to senior management, the regulators reminded firms that the Financial Policy Committee (FPC) will “keep the potential use of supervisory tools under review“. Firms will need to show sufficient progress by mid-2020 to avoid the FPC seeking recourse to such supervisory tools.
The FCA has warned CEOs that how a firm handles non-financial misconduct is indicative of a firm’s culture. It is the FCA’s view that embedding healthy cultures includes, therefore, taking steps to address the discrimination, harassment and bullying that remains “prevalent” in firms.
In a ‘Dear CEO’ letter (the Letter), which follows recent incidents in the wholesale general insurance sector, the FCA considers the need for fundamental change in firms’ culture and calls on leaders to bring about that change. Continue reading
The second episode of Regulation in Focus, our podcast series of short, sharp insights into regulatory issues that matter to you, features London partners Hywel Jenkins (contentious financial services regulatory) and Christine Young (employment) discussing our top 5 tips for dealing with employee misconduct investigations in a regulated context.